A credit score is more than just a number, it can mean the difference between being denied or approved for credit. With a good credit score, you could qualify for an apartment rental, receive a higher loan for your mortgage or even get a lower interest rate on your car payment. In turn a low credit score could prevent you from buying the house you want, cost you more on insurance and even cost you a job.
What is a credit Score?
A credit score is a three-digit number which is formulated by using information from your credit history. It is used to analyze data in order to predict how someone would most likely behave in future financial situations. Your credit score is based off of several factors. Do you have debt? How much? Have you paid your bills on time? How many bills do you have? And so on. It is designed to measure your credit risk and determine if you are a trustworthy investment.
There are four major credit-scoring providers in the U.S. The top one is the FICO credit score. Almost all the largest banks use your FICO credit score to determine your credit standpoint. Many banks or credit companies provide your FICO credit score for free. It will update monthly, calculating your past and present financial behavior.
FICO score’s range from 300 to 850. The higher your number, the lower your credit risks. Between 725 to 760 is considered good credit, anything above is considered excellent. Good credit can fluctuate some depending on the lender, as well as, our present economic conditions.
How is a credit score determined?
Your credit report is based upon five different categories, giving you one FICO score. Each category weighs into the final decision making process.
Payment History (35%) – Your account payment history is the largest field determining your current credit score. This includes any late payments, payments paid on time, delinquencies, public records, etc. Basically, any payment you have or have not made.
Amounts Owed (30%) – This refers to how much you owe on your open accounts. Scoring companies create a ratio on the amount owed on your account relative to the amount available on your accounts. Therefore, having a low balance on your credit card and a high credit limit will significantly improve your score. However, this can also be damaging for people who have low credit limits with high balances.
Length of Credit History (15%) – How long ago did you open accounts? When’s the last time the accounts were used? The longevity of your credit history can make or break your credit.
Types of Credit Used (10%) – This means the mix of accounts you have. There are three types of accounts, installments, revolving and open. An installment account refers to a fixed payment. This could be a loan you pay monthly such as your mortgage or your student loans. Revolving accounts involves paying a different payment each month. A good example of a revolving account would be your credit cards. Lastly, an open account, which means a balance you pay in full every month. This could include a cell phone bill, utility bill, etc.
New Credit (10%) – New credit refers to any credit inquiries you have made and the number of recently opened accounts. When you’ve just begun new credit it can sometimes hurt your score because there is not much data to pull from.
Where can I get my credit score?
Many credit companies will provide a free credit report. However, if not, you must purchase it from a score provider. FICO, Experian, Equifax and Transunion are the top score providing companies. 90% of the largest banks use your FICO credit score for credit decisions.
Knowing how your credit score is collected can help you start the path to improvement. Your credit history is very important; it determines how much you’re approved for a loan, the amount you pay for insurance, a job position and more. Check back with Community Bank next week to find out how you can improve your credit score!